Microsoft finds new antitrust scrutiny

In a statement released shortly after the bid was made public, Sen. Herb Kohl, chairman of the Senate Antitrust Subcommittee, said, "We will need to scrutinize the deal carefully to insure that it will not cause any harm to the competitiveness of what has been a vibrant high tech marketplace, nor negatively impact the privacy rights of Internet users."

In addition, the Associated Press quoted a Justice Department spokeswoman as saying the agency will look into the competitive consequences of combining the companies, which together own about 32% of the U.S. search market. A department spokeswoman didn't immediately respond to a request for comment.

Such scrutiny is to be expected for any large deal involving Microsoft (MSFT:30.45, -2.15, -6.6%) , said Mark Ostrau, an antitrust attorney with Fenwick & West LLP in Mountain View, Calif.

Microsoft settled a Justice Department antitrust case in 2002, and remains under supervision in a Washington court as part of a related consent decree.

Earlier this month the European Commission announced the launch of two fresh probes into the company's competitive behavior, focusing on its Office and Internet browser software.

"Any time I'm asked to analyze a potential deal for a client with Microsoft, and handicap the level of [antitrust] review, I always say, 'You have to add the Microsoft factor'," Ostrau said. "Just about anything Microsoft does gets a close eye, and not without reason."

Microsoft's Windows software provides the digital framework for most PCs sold in the world, while its Office software dominates its respective market. That raises questions about any of Yahoo's extensive technology that could be pulled into either system and shut out competitors, Ostrau said.

Microsoft's bid for Yahoo (YHOO:28.38, +9.20, +48.0%) is widely seen as an effort to bolster competition with mutual rival Google Inc. in the online search and advertising markets. Google (GOOG:515.90, -48.40, -8.6%) has faced its own antitrust scrutiny over its pending acquisition of online advertising company DoubleClick, both here and in Europe.

"As in our recent examination of the Google-DoubleClick deal, we will need to investigate how this combination affects consumers, advertisers and businesses who increasingly use the Internet," Kohl said in his statement.

Ostrau speculated that should Microsoft succeed in buying Yahoo, the matter could get pulled into the consent decree that has Microsoft regularly reporting to a court on its competitive behavior. The decree was recently extended to November 2009, thanks to the efforts of a group of states led by New York.

However Jay Himes, the antitrust chief at the New York Attorney General's Office, said, "The consent decree and the Microsoft offer to buy Yahoo are entirely separate."

Edward Henneberry, co-chair of law firm Heller Ehrman LLP's European Practice Group with a focus on antitrust, said a combination of Microsoft and Yahoo could actually be presented by the companies as a boon for competition in the online advertising market, because it's currently dominated by Google.

"The case for them is they need the sufficient scale to compete with Google, and that'll be good for competition," Henneberry said. "This is going to get reviewed by agencies in the U.S. and Europe, and no one's thinking it won't be, but I wouldn't put any great note on that."

One of the complaints raised about the Google and DoubleClick merger was the large aggregation of user data that would be housed under one roof, theoretically making it more vulnerable to misuse. Such user data is collected by Internet firms to better target advertising.

Jeff Chester, executive director of the Center for Digital Democracy, which has opposed the Google and DoubleClick merger on privacy grounds, objected to Microsoft's bid for Yahoo.
A written statement from Chester said, "In an online era dominated by digital behemoths, consumers will be more vulnerable to having their personal information become the property of the GoogleClicks and Microhoos."

YahooSoft Bid Shakes The Start-Ups

Among the scenarios that have filled the daydreams of Silicon Valley's Internet start-ups are two happy endings: being acquired by Microsoft or being acquired by Yahoo!. So when those giants threaten to merge, as Microsoft proposed Friday with its $44.6 billion bid for Yahoo!, do the hopes of innovative young firms looking for buyouts get squashed in the melee?

The dreams may, at least, be put on hold. According to Microsoft's (nasdaq: MSFT - news - people ) most recent quarterly Securities and Exchange Commission filing, the company had about $21 billion in liquid assets--down from a peak of $60.6 billion in 2004. The layout for Yahoo! (nasdaq: YHOO - news - people )--which is a half cash-half equity deal--won't leave the $51 billion (annual revenue) software maker broke, but it may sate its appetite for acquisitions for a while.

A more likely reason that a YahooSoft deal could slow down further acquisitions is the red tape involved in a complex integration of bureaucracies. (See "A Messy Marriage.") If the deal closes, it could be months before Yahoo! and Microsoft sort out each other's businesses and are ready to begin integrating new ones, says Aaron Patzer, founder of online accounting start-up Mint.com.

"Right now, everything is going to be in flux," he says. Patzer says he had hoped to foster a partnership with Yahoo! Finance to distribute his free online accounting service. Since winning $50,000 in the TechCrunch 40 start-up, Patzer's Mint.com has also been an attractive buyout target, despite Patzer's claims that he intends to keep the business independent. Regardless, those kinds of deals may be on hold, he says.

"If you're a start-up, you need your own good revenue model now," he says. "If you were depending on getting acquired, combined with a looming recession, you could be in serious trouble in a year."

Patzer worries that even once the dust settles, a YahooSoft conglomerate won't be very friendly to start-ups. "Overall, I don't think it's great for the culture of the Valley. Yahoo! needs young, talented innovators, and the prospect of becoming part of a really large company like Microsoft is not very appealing to start-ups," he says. "They might want to be acquired, but they won't want to join an organization approaching 100,000 people." (Microsoft's head count is approximately 78,500 worldwide, while Yahoo! before the recently announced layoffs had 14,300.)

In recent months, both tech giants have been busy snapping up smaller companies. Microsoft paid $1.2 billion for enterprise search firm Fast Search & Transfer last month. It also bought a London-based Web geolocation company called Webmap in December and invested $250 million for a 2.5% stake in Facebook in October. Jerry Yang's takeover as Yahoo!'s chief executive had some startups predicting a new round of acquisitions. (See "Yahoo's Geek-Speaking CEO.") In September, Yahoo! bought up news aggregator Buzztracker, online ad network BlueLithium and e-mail client Zimbra.

But the merger and acquisition teams at Microsoft and Yahoo! might be "looking inward rather than outward" for the next months, says Jeff Clavier, founder of venture capital firm SoftTech VC, who has sold two Internet start-ups to AOL and one to Yahoo! in the last two years. "Figuring out an integration plan, who stays and who goes, what's important and what's redundant--it takes a long time," says Clavier. "They'll be stretched, and I have a hard time seeing how they could be looking at new talent and ideas."

Longer-term, Clavier says that integrating Yahoo! could make Microsoft a more appealing destination for young firms, partly due to the simple facts of geography. Owning Yahoo! would offer Microsoft better integration with Silicon Valley, and give start-ups an alternative to moving to Washington, he says. "The idea of buying a company, moving it to Redmond, making it part of 'the Borg' is no longer the model," he says, referring to Microsoft's unflattering corporate nickname.

In the meantime, the integration of the two companies may offer a competitive boost to start-ups living in the shadow of Microsoft and Yahoo!. Clavier points out that consolidation means layoffs, and layoffs mean talent that can be snapped up by start-ups. Scott Rafer, the former chief executive of MyBlogLog, a start-up acquired by Yahoo!, says that the YahooSoft deal means the two companies will be bogged down for months while his new firm, called Lookery, continues to innovate.

"We love this kind of stuff," he says. "The people who could actually do us some damage are going from slow to slower."

Lookery, an advertising network for ads that run on Facebook applications, is likely to find itself in direct competition with YahooSoft soon; Facebook struck a deal in August 2006 to place Microsoft ads on the site. Microsoft's latest deal, says Rafer, offers him a much-needed head start.

"We need to get big enough so that they can't just squash us like a bug," says Rafer. "The more time they spend worrying about which division gets merged with which division, the more time we have to grow."

Microsoft Eyes Yahoo to Topple Google

Unable to topple Google Inc. on its own, Microsoft Corp. is trying to force crippled rival Yahoo Inc. into a shotgun marriage, with a wager worth nearly $42 billion that the two companies together will have a better chance of tackling the Internet search leader

Microsoft's audacious attempt to buy Yahoo, spelled out in an unsolicited offer announced Friday, shows just how much Google threatens the world's largest software maker's grip on how people interact with computers.

For Yahoo, the bid represents another painful reminder of how missed opportunities and mismanagement combined to open the door for Google to supplant it as the Internet's main gateway, decimating its stock price in the process.

Redmond, Wash.-based Microsoft is trying to avoid a similar fate at Google's hands as more people access services and computer programs online instead of relying on packaged software applications.

Although Microsoft remains the world's most valuable technology company, its position will become more precarious unless it can cultivate a more loyal Internet audience and generate more online ad revenue to subsidize the free services taken for granted on the Internet.
Microsoft is acutely aware of the upheaval that can be caused by a pivotal shift in technology, having been the biggest beneficiary during the 1980s and 1990s of a transition from mainframe computers to personal computers that knocked IBM Corp. off its pedestal.

"Microsoft has to do this deal. It's a battle that Microsoft needs to win," said AMR Research analyst Jonathan Yarmis.

But there's no guarantee that Yahoo will be willing to sell to Microsoft -- or that the deal will win the necessary approvals from antitrust regulators in the United States and Europe if Yahoo capitulates.

Sunnyvale-based Yahoo had little to say Friday beyond a terse statement assuring its shareholders that its board will "carefully and promptly" study the bid.

In a conference call Friday, Microsoft Chief Executive Steve Ballmer indicated he won't take no for an answer after Yahoo rebuffed takeover overtures a year ago.

"This is a decision we have -- and I have -- thought long and hard about," Ballmer said. "We are confident it's the right path for Microsoft and Yahoo."

Yahoo will likely face intense pressure to accept, given its steadily sliding profits and a murky 2008 outlook that caused its stock price to drop to a four-year low earlier this week.

Microsoft's $31-per-share offer -- originally valued at $44.6 billion -- represented a 62 percent premium to Yahoo's closing price late Thursday, although it's below Yahoo's 52-week high of $34.08 reached less than four months ago. On Friday, the total value of the cash-and-stock deal fell to $41.7 billion, or $28.95 per share, because Microsoft's shares declined on the news.

Yahoo shares soared to a split-adjusted high of $118.75 in 2000 before the dot-com bust. That peak coincidentally also was just before Yahoo gave Google its first big break by hiring it to run its search engine.

Search engines are crucial tools because they have become a central hub in hugely profitable ad networks.

Advertisers around the world are expected to double their spending on the Internet during the next three years as more people get their news and entertainment on the Web instead of television, radio, newspapers and magazines. The trend is expected to create an $80 billion online ad market in 2010, up from an estimated $40 billion last year.

After realizing how much money Google was making from search, Yahoo introduced its own technology in 2004, but by then it was too little, too late.

Forrester Research analyst Charlene Li expects Yahoo to resist, predicting the company "will do everything possible to stay independent," even if it means swallowing its pride and rehiring Google to run its search engine and sell ads on its site.

Other analysts still think Yahoo might try to line up a white knight rather than fall into Microsoft's clutches. Analysts mentioned several other potential suitors, including News Corp. and InterActiveCorp.

Dinosaur Securities analyst David Garrity even thinks it's possible that China's search leader, Baidu.com Inc., or Chinese e-commerce conglomerate Alibaba.com Inc. might bid for Yahoo. Alibaba.com is 40 percent owned by Yahoo.

In what most analysts regard as a long shot, there was even some chatter that longtime Microsoft rival Apple Inc. and its CEO, Steve Jobs, might come to Yahoo's rescue.

If push comes to shove, most analysts believe Microsoft will raise its cash-and-stock bid.

Investors appear confident an agreement eventually will be reached. Yahoo shares climbed $9.20, or nearly 48 percent, to $28.38 while Microsoft shares fell $2.15, or 6.6 percent, to $30.45 -- a sign that Wall Street is skeptical about whether the acquisition makes sense.

"It's a classic case of a buyer overbidding to blow any potential competitors out of the water," said James Owers, a Georgia State University professor of corporate finance.

Shortly after Microsoft disclosed its intentions, the U.S. Justice Department said it is "interested" in reviewing antitrust issues. European Union officials declined to comment, but analysts said Microsoft probably will face more challenges getting a Yahoo acquisition approved in Europe than the United States.

Microsoft made its offer a few hours after Yahoo's chairman, Terry Semel, stepped down, removing a potential stumbling block. Semel had rejected Microsoft's takeover overtures a year ago while he was still Yahoo's chief executive, according to a letter released Friday.

Yahoo co-founder Jerry Yang replaced Semel as CEO nearly eight months ago while another Yahoo director, Roy Bostock, is now chairman.

Yang, a billionaire who is one of Yahoo's largest shareholders, isn't believed to have warm and fuzzy feelings about Microsoft. He has openly expressed his admiration for Jobs and last year even invited the Apple CEO to Yahoo's headquarters for a pep talk with employees.

Microsoft believes its technological expertise will be a good fit with Yahoo's knack for providing content and services that keep people coming back to its site. Combined, the two companies would reach a U.S. online audience of 142 million compared with 124 million for Google, according to Nielsen Online.

But Yahoo and Microsoft are so far behind Google in the lucrative search market that they still will have a lot of ground to make up even if they joined forces.

Google already controls 62 percent of the worldwide search market, and has been widening its lead, according to the latest data from comScore Media Metrix. By combining, Microsoft and Yahoo would have a 16 percent share of the worldwide search market, the Web traffic tracking company said.

Google shares fell $48.40, or 8.6 percent, to close at $515.90 Friday, but the downturn appeared to be driven more by a disappointing fourth-quarter earnings report than by Microsoft's bid for Yahoo.

Besides helping to boost its online ad revenue, Microsoft believes it could mine more profit from Yahoo by jettisoning workers and eliminating overlapping operations.

Microsoft said it sees at least $1 billion in cost savings if it buys Yahoo. Microsoft executives deflected questions about how many jobs might be lost, but the company emphasized retention packages will be offered to Yahoo engineers and other key employees, including some executives.

The fate of Yahoo's brand also is unclear if Microsoft takes over. Both Ballmer and Kevin Johnson, president of Microsoft's platforms and services division, hailed Yahoo's strong brand value but did not commit to keeping the name alive.

Microsoft Offers $44.6B for Yahoo

Microsoft Corp. has pounced on slumping Internet icon Yahoo Inc. with an unsolicited takeover offer of $44.6 billion in its boldest bid yet to challenge Google Inc.'s dominance of the lucrative online search and advertising markets. The Justice Department says it is interested in reviewing antitrust issues associated with it.

The surprise offer of $31 per share, made late Thursday and announced Friday, seizes on Yahoo's weakness while Microsoft tries to muscle up in a high-stakes battle with Google likely to define the technology landscape for years to come.

In a statement Friday, Yahoo said it will "carefully and promptly" study Microsoft's bid.
With its profits steadily sliding, Yahoo's stock slipped to a four-year low earlier this week and a new management team has been trying to steer a turnaround but sees more turbulence through 2008.

The announcement lifted Yahoo's share price by almost 50 percent in morning trading, while Google fell almost 8 percent, dragged down by a fourth-quarter earnings report that missed Wall Street expectations.

In conference call Friday morning, Microsoft Chief Executive Steve Ballmer indicated he won't take no for an answer after Yahoo rebuffed takeover overtures a year ago.
"This is a decision we have -- and I have -- thought long and hard about," Ballmer said. "We are confident it's the right path for Microsoft and Yahoo."

To underscore its resolve, Microsoft is offering a 62 percent premium to Yahoo's closing stock price Thursday. If the deal is consummated, it would be by far the largest acquisition in Microsoft's history, eclipsing last year's $6 billion purchase of online ad service aQuantive.
Since reaching a 52-week high of $34.08 in October, Yahoo shares have fallen 46 percent. Yahoo climbed $9.41 a share, or 49 percent, to $28.59 in morning trading. Microsoft shares fell $1.43, or 4.4 percent, to $31.17.

Microsoft publicly disclosed its cash-and-stock offer in hopes of rallying support from Yahoo's shareholders, making it more difficult for Yahoo's board to turn down the bid.

In a letter released Friday, Ballmer pointedly noted Yahoo's financial performance has deteriorated since Microsoft was spurned a year ago. At that time, Ballmer said he was told Yahoo believed it was better off on its own.

"A year has gone by, and the competitive situation has not improved," Ballmer wrote in his letter.

Microsoft's previous offer was rebuffed by Terry Semel, who stepped aside last year as chief executive under shareholder pressure.

Microsoft sent its latest takeover offer to Yahoo late Thursday, shortly after Semel resigned as the company's chairman. The letter is addressed to Semel's successors, new Chairman Roy Bostock and the current CEO, co-founder Jerry Yang, who is one of Yahoo's largest shareholders.

In a prepared statement, Yahoo said its board "will evaluate this proposal carefully and promptly in the context of Yahoo's strategic plans and pursue the best course of action to maximize long-term value for shareholders."

Microsoft views Yahoo as its best chance to thwart Google, which has leveraged its leadership in Internet search and advertising to emerge as an increasingly serious threat to the world's largest software maker's persuasive influence on how people interact with computers.

Google already controls nearly 60 percent of the U.S. search market, and has been widening its lead, despite concerted efforts by both second-place Yahoo and third-place Microsoft. By combining, Microsoft and Yahoo would have a 33 percent share of the U.S. search market, according to the latest data from comScore Media Metrix.

By joining forces, Microsoft and Yahoo also would widen their narrowing advantage over Google in providing free e-mail accounts -- a service that helps foster more loyalty with users and create more advertising opportunities.

Advertisers around the world are expected to double their spending on the Internet during the next three years as more people get their news and entertainment on the Web instead of television, radio, newspapers and magazine. The trend is expected to create an $80 billion online ad market in 2010, up from an estimated $40 billion last year.

Despite an aggressive push in recent years, Microsoft's online advertising expansion hasn't paid off. Last week, the Redmond, Wash.-based company reported a 79 percent jump in its overall profit, but its online division's loss widened to $245 million.

And Yahoo has been struggling to attract more advertising even though its Web site attracts one of the biggest audiences. The Sunnyvale-based company's profit has declined for five consecutive quarters, prompting plans to cut 1,000 jobs later this month, a 7 percent reduction of its 14,300-employee work force.

Besides helping to boost its online ad revenue, Microsoft believes it could mine more profit from Yahoo by jettisoning workers and eliminating overlapping operations.

Microsoft said it sees at least $1 billion in cost savings if it buys Yahoo. Microsoft executives deflected questions about how many jobs might be lost, but the company emphasized retention packages will be offered to Yahoo engineers and other key employees, including some executives.

The fate of Yahoo's brand also is unclear if Microsoft takes over. Both Ballmer and Kevin Johnson, president of Microsoft's platforms and services division, hailed Yahoo's strong brand value but didn't commit to keeping the name alive.